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Banks to sell first post-crisis managed synthetic CDO

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Re: Banks to sell first post-crisis managed synthetic CDO

#21

Post by vsareto »

morley wrote: post #17
nickles wrote: post #13

It has been argued that the current environment of low rates is driven by a safe asset shortage [0]. Many investors (e.g. insurance companies, pension funds) need to match liabilities with assets yielding reliable returns. With a constrained supply of safe assets, this demand drives yields down. Austrian economists argue that the resulting level of interest rates may be artificially low, leading to 'malinvestment' [1…

Your comment illustrates what I found so frustrating about The Big Short, and people who cite it whenever CDOs are brought up: the filmmakers made no effort in understanding the theory behind CDOs, nor did they attempt to explain the potential benefits. Now... it's possible that the way human nature works, CDOs will always result in companies engage in collective delusion that results in a similar meltdown. I think T…

CDOs could be more vulnerable to corrupt practices than other systems. The US banking system could be too corrupt to safely employ CDOs in the long-term.

This is difficult to put into theory because corruption is difficult to measure, but I think we've all seen one example already. It wouldn't be the first thing that's great in theory but not in practice.

Re: Banks to sell first post-crisis managed synthetic CDO

#22

Post by ficklepickle »

overcast wrote: post #9
tenebrisalietum wrote: post #7

Earlier quoted context omitted.

You will always have the haves and have-nots. You will always have tribal borders. The haves will gain and use knowledge and technology to make their lives and those of their tribe easier and it will benefit them more than those of the have-nots. So written language containing the body of science and technical knowledge benefits them always. The effect on the entire species is unimportant to those with comfortable, l…

So basically the evolutionary gift we've received, is being wasted on us.

100%. We have a powerful conscious mind that we use to rationalize our primate biases. It used to bum me out, but I've developed a more zen-like outlook. It just is. Everything just is.

Re: Banks to sell first post-crisis managed synthetic CDO

#24

Post by nradov »

nickles wrote: post #13

It has been argued that the current environment of low rates is driven by a safe asset shortage [0]. Many investors (e.g. insurance companies, pension funds) need to match liabilities with assets yielding reliable returns. With a constrained supply of safe assets, this demand drives yields down. Austrian economists argue that the resulting level of interest rates may be artificially low, leading to 'malinvestment' [1…

This is one reason why defined benefit pension plans are a terrible idea with hidden risks for employees, employers, and taxpayers. Everyone pretends things are fine but when investment returns come in below expectations the illusion will fall apart. As a society we should aggressively phase out pensions and replace them with defined contribution plans.

Re: Banks to sell first post-crisis managed synthetic CDO

#25

Post by tialaramex »

morley wrote: post #17
nickles wrote: post #13

It has been argued that the current environment of low rates is driven by a safe asset shortage [0]. Many investors (e.g. insurance companies, pension funds) need to match liabilities with assets yielding reliable returns. With a constrained supply of safe assets, this demand drives yields down. Austrian economists argue that the resulting level of interest rates may be artificially low, leading to 'malinvestment' [1…

Your comment illustrates what I found so frustrating about The Big Short, and people who cite it whenever CDOs are brought up: the filmmakers made no effort in understanding the theory behind CDOs, nor did they attempt to explain the potential benefits. Now... it's possible that the way human nature works, CDOs will always result in companies engage in collective delusion that results in a similar meltdown. I think T…

What potential benefit of CDOs did you feel wasn't explained?

The movie is based on a book. Do you feel the book's author (Michael Lewis who has written about mortgage backed securities for years) also doesn't understand the theory behind CDOs? Or that the filmmakers didn't understand the book?

Re: Banks to sell first post-crisis managed synthetic CDO

#26

Post by darawk »

tialaramex wrote: post #25
morley wrote: post #17

Earlier quoted context omitted.

Your comment illustrates what I found so frustrating about The Big Short, and people who cite it whenever CDOs are brought up: the filmmakers made no effort in understanding the theory behind CDOs, nor did they attempt to explain the potential benefits. Now... it's possible that the way human nature works, CDOs will always result in companies engage in collective delusion that results in a similar meltdown. I think T…

What potential benefit of CDOs did you feel wasn't explained? The movie is based on a book. Do you feel the book's author (Michael Lewis who has written about mortgage backed securities for years) also doesn't understand the theory behind CDOs? Or that the filmmakers didn't understand the book?

I've read the book. And all his other books. They're fun, but they're not a great source for serious understanding.

The book and movie does briefly explain all this, but it paints a picture that the instruments themselves were inherently toxic, which was not the case. What was toxic were the assumptions that went into modeling their risk characteristics.

The assets (like all assets) themselves were fine. The problem was that people didn't understand them.

Re: Banks to sell first post-crisis managed synthetic CDO

#27

Post by Retric »

nradov wrote: post #24
nickles wrote: post #13

It has been argued that the current environment of low rates is driven by a safe asset shortage [0]. Many investors (e.g. insurance companies, pension funds) need to match liabilities with assets yielding reliable returns. With a constrained supply of safe assets, this demand drives yields down. Austrian economists argue that the resulting level of interest rates may be artificially low, leading to 'malinvestment' [1…

This is one reason why defined benefit pension plans are a terrible idea with hidden risks for employees, employers, and taxpayers. Everyone pretends things are fine but when investment returns come in below expectations the illusion will fall apart. As a society we should aggressively phase out pensions and replace them with defined contribution plans.

Defined benifit pensions can utilize the same investments as defined contribution pensions. The actual difference is who gets the surplus from early deaths, either other pensioners or children/charities etc. Equivalent investments are thus safer in defined benifit pensions at least in terms of a safe retirement.

Of course this is all rather dependent on good regulations and equivalent funding. Allow companies to issue dividends or stock buybacks with under funded pensions and you get seriously perverse incentives.

Re: Banks to sell first post-crisis managed synthetic CDO

#29

Post by wpietri »

darawk wrote: post #26
tialaramex wrote: post #25

Earlier quoted context omitted.

What potential benefit of CDOs did you feel wasn't explained? The movie is based on a book. Do you feel the book's author (Michael Lewis who has written about mortgage backed securities for years) also doesn't understand the theory behind CDOs? Or that the filmmakers didn't understand the book?

I've read the book. And all his other books. They're fun, but they're not a great source for serious understanding. The book and movie does briefly explain all this, but it paints a picture that the instruments themselves were inherently toxic, which was not the case. What was toxic were the assumptions that went into modeling their risk characteristics. The assets (like all assets) themselves were fine. The problem…

In that assets are only created for people to purchase with informed understanding, I don't think "they were great but nobody understood them" is a possible thing.

The clearest example here is shares in a Ponzi scheme. Those are definitely assets, and they are definitely not fine. They are made to not be understood. The same is more subtly true of the previous wave of essentially fraudulent mortgage-backed securities. But I think the same is also true of any hard-to-understand instrument engineered to look like a good deal at first glance.

You also ignore systemic risk. For many years before the 2008 collapse, cognoscenti knew that a lot of risk had gone somewhere, we just didn't know where. But we sure found out! Saying that "all assets are fine" is sort of like saying "all chemicals are fine". It's technically true, in that dioxin and DDT don't intend to be harmful. But if the evidence shows that people can't use them responsibly, then a ban in a totally reasonable outcome.

Re: Banks to sell first post-crisis managed synthetic CDO

#30

Post by snarf21 »

Pigo wrote: post #28

As long as corporate welfare is there to bail them out, I feel like we're at least partly to blame for expecting something different.

I'll bite. So how do we fix it? Most people just want to live their life and not fight the powers that be. Only when things get really bad to people stand up in numbers. Voting for change is just living "Animal Farm" in real life.

I'm not trying to be snarky or cynical. I'm really not sure how we exit this spiral.

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